424B3 1 mpg2012119424b3.htm 424B3 MPG 2012.11.9 424B3


Filed Pursuant to Rule 424(b)(3)
Registration No. 333-166439
 
MPG OFFICE TRUST, INC.
SUPPLEMENT NO. 3 DATED NOVEMBER 9, 2012
TO POST-EFFECTIVE AMENDMENT NO. 2 DATED MARCH 15, 2012
This document supplements, and should be read in conjunction with, our Post-Effective Amendment No. 2 dated March 15, 2012 relating to the potential sale of up to 170,526 shares of our common stock by the selling security holders named in the prospectus should they exchange their units representing common limited partnership units in MPG Office, L.P. for common stock (the “prospectus”). Capitalized terms used in this supplement have the same meaning as set forth in the prospectus. The purpose of this supplement is to disclose:

“Risk Factors” provided in Part II, Item 1A of our Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2012, filed with the Securities and Exchange Commission (the “SEC”) on November 9, 2012;

“Management’s Discussion and Analysis of Financial Condition and Results of Operations” provided in Part I, Item 2 of our Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2012, filed with the SEC on November 9, 2012; and
 
Our unaudited consolidated financial statements as of and for the three and nine months ended September 30, 2012, as provided in Part I, Item 1 of our Quarterly Report on Form 10-Q, filed with the SEC on November 9, 2012.






RISK FACTORS


Some of the risks and uncertainties that may cause our actual results, performance, liquidity or achievements to differ materially from those expressed or implied by forward-looking statements include, among others, the following:

Our liquidity situation, including our failure to obtain additional capital or extend or refinance debt maturities on favorable terms or at all;

Our failure to reduce our significant level of indebtedness;

Risks associated with the timing and consequences of loan defaults and non-core asset dispositions;

Risks associated with our loan modification and asset disposition efforts, including potential tax ramifications;

Risks associated with our ability to dispose of properties with potential value above the debt, if and when we decide to do so, at prices or terms set by or acceptable to us;

Decreases in the market value of our properties;

Decreased rental rates, increased lease concessions or failure to achieve occupancy targets;

Defaults on or non-renewal of leases by tenants;

Our dependence on significant tenants;

Adverse economic or real estate developments in Southern California, particularly in the Los Angeles Central Business District (“LACBD”);

The disruption of credit markets or a global economic slowdown;

Potential loss of key personnel (most importantly, members of senior management);

Increased interest rates and operating costs;

Difficulty in operating the properties owned through our unconsolidated joint venture;

Our failure to maintain our status as a real estate investment trust (“REIT”);

Environmental uncertainties and risks related to earthquakes and other natural disasters;

Future terrorist attacks in the U.S.;

Risks associated with our organizational structure; and

Changes in real estate and zoning laws and increases in real property tax rates.

Set forth below are some (but not all) of the factors that could adversely affect our performance and financial condition. We believe the following risks are material to our stockholders. You should carefully consider the following factors in evaluating our company, our properties and our business. The occurrence of any of the following risks might cause our stockholders to lose all or part of their investment. For the purposes of this section,

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the term “stockholders” means the holders of shares of our common stock and of our 7.625% Series A Cumulative Redeemable Preferred Stock (the “Series A preferred stock”).

We may not have sufficient cash to maintain our operations.

Our operating cash flows or capital may not be sufficient to pay our debt as it comes due, interest on our debt and other operating expenses. We have limited other sources of cash and such sources may be insufficient to fund our needs. If we are unable to access other sources of cash, it could lead to our eventual insolvency.

We may not be able to extend, refinance or repay our substantial indebtedness, which could have a materially adverse effect on our business, financial condition, results of operations and common stock price.

We have a substantial amount of debt that we may not be able to extend, refinance or repay on favorable terms or at all. As of September 30, 2012, we have $898.0 million of debt maturing in 2013.

We may face challenges in repaying, extending or refinancing our existing debt on acceptable terms or at all, which would be most significant with respect to our major near-term maturities at US Bank Tower (July 2013), KPMG Tower (October 2013) and 777 Tower (November 2013). Failure to pay off, refinance or extend our debt as it comes due, or a failure to satisfy the conditions and requirements of such debt, could result in an event of default that could potentially allow lenders to exercise their remedies under the loans, including accelerating such debt and foreclosing on the asset. Completed foreclosures could create taxable income without accompanying cash proceeds, a circumstance that could hinder our ability to meet the REIT distribution requirements imposed by the Internal Revenue Code of 1986, as amended (the “Code”). See —“Our ability to utilize our net operating loss carryforwards and certain other tax attributes may be limited under certain circumstances.” If we are unable to extend, refinance or repay our debt as it comes due, our business, financial condition, results of operations, common stock price and Series A preferred stock price may be materially and adversely affected and we could become insolvent.

Furthermore, even if we are able to obtain extensions on or refinance our existing debt, such extensions or new loans may include operational and financial covenants significantly more restrictive than our current debt covenants. Any such extensions may require principal paydowns, the funding of additional reserve amounts and the payment of certain fees to, and expenses of, the applicable lenders. In addition, lenders may impose cash flow restrictions in connection with refinancings, such as cash flow sweeps and lock boxes. Any such payments and cash flow restrictions will affect our ability to fund our ongoing operations from our operating cash flows, as discussed in this prospectus supplement.

Our substantial indebtedness also requires us to use a material portion of our cash flow to service principal and interest on our debt, which limits the cash flow available for other business expenses or opportunities.

We may not be able to raise capital to repay our debt or finance our operations.

We continue to assess our ability to generate capital from a variety of sources and access to any significant source may be very challenging. There can be no assurance that any of these capital raising activities will be successful. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

Our ability to access the capital markets to raise capital is highly uncertain. Our substantial indebtedness may prevent us from being able to raise debt financing on acceptable terms, or at all. We believe we are unlikely to be able to raise equity capital in the capital markets. Even if we are able to raise capital through the issuance of debt or equity securities or the incurrence of additional indebtedness, the terms of that debt or equity would likely be highly dilutive to holders of our common stock.


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Our ability to sell our properties to raise capital is uncertain, and asset sales may decrease the value of our common stock and our Series A preferred stock. Companies known to be liquidating assets in order to fund liquidity needs may lose negotiation and pricing power. Accordingly, if we are forced to sell properties to meet our liquidity requirements, the sale prices may reflect discounts to fair value. We also believe that the concentration of our properties in downtown Los Angeles creates operating and leasing synergies that enhance the value of our company. Selling properties on a one-off basis to fund liquidity needs, therefore, may diminish those synergies and decrease the value of our remaining portfolio of properties. Our basis in each of our properties is substantially less than the value of those properties and, in some cases, the amount of indebtedness encumbering those properties. Accordingly, asset sales may cause us to become liable for material taxes. See —“Our ability to utilize our net operating loss carryforwards and certain other tax attributes may be limited under certain circumstances.” Asset sales also could require us to incur potentially significant transaction expenses, even if our efforts to sell an asset are not successful. In addition, asset sales typically take significantly longer to complete than issuances of debt or equity securities, exposing us to additional market and economic risks.

Our substantial indebtedness adversely affects our financial health and operating flexibility.

As of September 30, 2012, our total consolidated indebtedness was $2.5 billion, including $0.5 billion of debt associated with mortgages in default. Payments of principal and interest on borrowings may leave us with insufficient cash resources to operate our properties. We do not generate sufficient cash flow after debt service to reinstate distributions on our common stock and/or Series A preferred stock in the foreseeable future. Our existing mortgage agreements contain lockbox and cash management provisions, which, under certain circumstances, limit our ability to utilize available cash flow at the specific property, including for the payment of distributions. Our level of debt and the limitations imposed on us by our debt agreements could have significant adverse consequences to us and the value of our common stock and Series A preferred stock, regardless of our ability to refinance or extend our debt, including:

Limiting our ability to borrow additional amounts for working capital, capital expenditures, debt service requirements, execution of our business plan or other purposes;

Limiting our ability to use operating cash flow in other areas of our business or to pay dividends because we must dedicate a substantial portion of these funds to service our debt;

Increasing our vulnerability to general adverse economic and industry conditions;

Limiting our ability to capitalize on business opportunities and to react to competitive pressures and adverse changes in government regulations;

Limiting our ability to fund capital expenditures, tenant improvements and leasing commissions; and

Limiting our ability or increasing the costs to refinance our indebtedness.

The lockbox and cash management arrangements contained in our loan agreements require that substantially all of the income generated by our special purpose property-owning subsidiaries be deposited directly into lockbox accounts and then swept into cash management accounts for the benefit of our lenders. With the exception of the mortgages in default, cash is distributed to us only after funding of improvement, leasing and maintenance reserves and the payment of debt service, insurance, taxes, operating expenses, and extraordinary capital expenditures and leasing expenses.

Given the restrictions in our debt covenants and those that may be included in any loan extensions or new loans we may obtain in the future, we may be significantly limited in our operating and financial flexibility and may be limited in our ability to respond to changes in our business or competitive activities.


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Our ability to utilize our net operating loss carryforwards and certain other tax attributes may be limited under certain circumstances.

As of December 31, 2011, we had approximately $1.1 billion of federal and $1.0 billion of state net operating loss (“NOL”) carryforwards available to offset future taxable income. Under Section 382 of the Code, if a corporation undergoes an “ownership change” (generally defined as a greater than 50% change (by value) in its equity ownership over a three‑year period), the corporation’s ability to use its pre-change NOL carryforwards and other pre-change tax attributes to offset its post-change income may be limited. As a result, if we undertake certain strategic alternatives or capital raising opportunities to generate cash, or if trading in our stock exceeds certain levels and meets other requirements, we may undergo an “ownership change” and our ability to use our pre-change NOL carryforwards to offset U.S. federal taxable income may become subject to limitations.

From 2008 through 2011, the State of California suspended the use of NOL carryforwards to offset taxable income for California franchise tax purposes, and it is possible that California will extend this legislation to 2012 and future taxable years, however, as of September 30, 2012, no guidance has been issued. If our California NOL carryforwards continue to be suspended, while we generally would not be required to pay California franchise tax to the extent we distribute our taxable income to our stockholders, if we recognize taxable income or gain but have insufficient cash to fully distribute such income or gain to our stockholders such as upon a foreclosure or sale of one of our assets not generating significant cash proceeds, or potentially in the case of a change of control of MPG Office Trust, Inc. (“the Company”) in a taxable transaction but not generating sufficient cash, or if we choose not to distribute cash to our stockholders, we would not be able to use our NOL carryforwards to offset such taxable income or gain for California franchise tax purposes. In that case, to the extent that our California NOL carryforwards did not offset our California taxable income, it would be subject to the regular California corporate tax rate of 8.84%.

We are subject to tax indemnification obligations in the event that we dispose of certain properties prior to June 27, 2013 that could limit our operating flexibility.

In connection with our initial public offering, we agreed to indemnify Robert F. Maguire III and related entities and other contributors from all direct and indirect adverse tax consequences in the event that MPG Office, L.P. (the “Operating Partnership”) directly or indirectly sells, exchanges or otherwise disposes (including by way of merger, sale of assets, completion of a foreclosure or otherwise) of any portion of its interests in certain properties in a taxable transaction. Certain types of transactions, including but not limited to joint ventures and refinancings, can be structured to avoid triggering the tax indemnification obligations. The tax indemnification obligations may serve to prevent the disposition of Gas Company Tower, US Bank Tower, KPMG Tower, Wells Fargo Tower and Plaza Las Fuentes prior to June 27, 2013 that might otherwise provide important liquidity alternatives to us.

If we do not comply with the financial covenants and reporting requirements of our mortgage loan agreements, our ability to raise capital may be impaired and could result in defaults under our existing mortgage loans.

In connection with our year-end 2012 financial reporting, management will need to perform an evaluation of MPG Office Trust, Inc.’s ability to continue as a going concern. If management cannot conclude that MPG Office Trust, Inc. will be able to continue as a going concern for a reasonable period of time from the date of our year-end consolidated financial statements, our independent registered public accounting firm will need to include an explanatory paragraph in its report on the consolidated financial statements regarding the substantial doubt to continue as a going concern. If we receive such an explanatory paragraph in our opinion, it might impede our ability to raise funds. The ability of MPG Office Trust, Inc. to continue as a going concern depends in part upon our ability to generate cash from operations or obtain suitable and adequate financing that, in each case, is sufficient to fund our operations, service our indebtedness and potentially re-balance our indebtedness so that it can be refinanced at maturity. There can be no assurance that we will be successful in achieving any of these objectives. In addition, pursuant to the terms of the Gas Company Tower, KPMG Tower, Plaza Las Fuentes and Wells Fargo Tower mortgage loan agreements and the Plaza Las Fuentes mezzanine loan agreement, we are required to provide

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annual audited financial statements of MPG Office Trust, Inc. to the lenders or agents. The receipt of any opinion other than an “unqualified” audit opinion on our annual audited financial statements is an event of default under the loan agreements for the properties listed above. If an event of default occurs, the lenders have the right to pursue the remedies contained in the loan documents, including acceleration of all or a portion of the debt and foreclosure on the asset. Any such default or completed foreclosure could have significant adverse consequences to us and to the value of our common stock and Series A preferred stock.

Pursuant to the terms of certain of our mortgage loan agreements, we are required to report a debt service coverage ratio (“DSCR”) calculated using the formulas specified in the underlying loan agreements. We have submitted the required reports to the lenders for the measurement periods ended September 30, 2012. Under the Gas Company Tower mortgage loan, we reported a DSCR of 1.06 to 1.00, calculated using actual debt service under the loan, and a DSCR of 0.84 to 1.00, calculated using actual debt service plus a hypothetical principal payment using a 30-year amortization schedule. Because the reported DSCR using the actual debt service plus a hypothetical principal payment was less than 1.00 to 1.00, the lender could seek to remove the Company as property manager of Gas Company Tower.

As of the date of this prospectus supplement, one of our special purpose property-owning subsidiaries is in default under a non-recourse mortgage loan.

Our special purpose property-owning subsidiary was in default as of September 30, 2012 under the non‑recourse mortgage loan secured by 3800 Chapman.

We have entered into an agreement with the special servicer pursuant to which the Company will temporarily remain the title holder of the asset until it is transferred to another party or there is a complete foreclosure, with a definitive outside date of December 31, 2012 by which we will cease to own the asset. We are not obligated to pay any amounts and are not subject to any liability or obligation in connection with our exit from the asset, other than to cooperate in the sale or other disposition. We expect to receive a general release of claims under the loan documents at the time of exit. Also pursuant to this agreement, our Operating Partnership received a release from all claims under the guaranty of partial payment.

Additional risk factors are discussed in our Annual Report on Form 10-K filed with the SEC on March 15, 2012. Moreover, we operate in a highly competitive and rapidly changing environment. New risk factors emerge from time to time, and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.


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MPG OFFICE TRUST, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

As used in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, the terms “MPG Office Trust,” the “Company,” “us,” “we” and “our” refer to MPG Office Trust, Inc. Additionally, the term “Properties in Default” refers to our Two California Plaza and 3800 Chapman properties, whose mortgage loans were in default as of September 30, 2012 and where our ultimate goal is to exit the assets. On October 1, 2012, a trustee sale was held with respect to Two California Plaza pursuant to which the property was disposed. See “Subsequent Event.”

Overview and Background

We are a self-administered and self-managed REIT, and we operate as a REIT for federal income tax purposes. We are the largest owner and operator of Class A office properties in the LACBD.

Through our controlling interest in the Operating Partnership, of which we are the sole general partner and hold an approximate 99.7% interest, and the subsidiaries of our Operating Partnership, including MPG TRS Holdings, Inc., MPG TRS Holdings II, Inc., and MPG Office Trust Services, Inc. and its subsidiaries (collectively known as the “Services Companies”), we own, manage and lease real estate located primarily in the greater Los Angeles area of California. This real estate primarily consists of office properties, parking garages and land parcels.

As of September 30, 2012, our Operating Partnership indirectly owns whole or partial interests in 10 office properties, off-site parking garages, and on-site structured and surface parking (our “Total Portfolio”). We hold an approximate 99.7% interest in our Operating Partnership, and therefore do not completely own the Total Portfolio. Excluding the 80% interest that our Operating Partnership does not own in MPG Beacon Venture, LLC (the “joint venture”), our Operating Partnership’s share of the Total Portfolio is 8.3 million square feet and is referred to as our “Effective Portfolio.” Our Effective Portfolio represents our Operating Partnership’s economic interest in the office properties and parking garages from which we derive our net income or loss, which we recognize in accordance with U.S. generally accepted accounting principles (“GAAP”). The aggregate square footage of our Effective Portfolio has not been reduced to reflect our limited partners’ 0.3% share of our Operating Partnership.

Our property statistics as of September 30, 2012 are as follows:

 
Number of
 
Total Portfolio
 
Effective Portfolio
 
Properties
 
Buildings
 
Square
Feet
 
Parking
Square
Footage
 
Parking
Spaces
 
Square
Feet
 
Parking
Square
Footage
 
Parking
Spaces
LACBD
6

 
7

 
7,425,360

 
3,058,384

 
9,370

 
6,596,996

 
2,697,682

 
8,320

Other Properties
2

 
5

 
519,789

 
416,290

 
1,285

 
258,561

 
83,258

 
257

Properties in Default
2

 
2

 
1,488,125

 
888,168

 
1,958

 
1,488,125

 
888,168

 
1,958

 
10

 
14

 
9,433,274

 
4,362,842

 
12,613

 
8,343,682

 
3,669,108

 
10,535

Percentage Leased
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
LACBD
 
 
 
 
78.7
%
 
 
 
 
 
79.1
%
 
 
 
 
Other Properties
 
 
 
 
100.0
%
 
 
 
 
 
100.0
%
 
 
 
 
Properties in Default
 
 
 
 
76.3
%
 
 
 
 
 
76.3
%
 
 
 
 

We directly manage the properties in our Total Portfolio through our Operating Partnership and/or our Services Companies, except for Two California Plaza and 3800 Chapman (each of which was in receivership as of September 30, 2012) and Cerritos Corporate Center (a joint venture property).


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MPG OFFICE TRUST, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

We receive income primarily from rental revenue (including tenant reimbursements) from our office properties, and to a lesser extent, from our on- and off-site parking garages. We receive income from the joint venture for providing management services for One California Plaza and leasing services for both joint venture properties.

Liquidity and Capital Resources

General

Our business requires continued access to adequate cash to fund our liquidity needs. Over the last several years, we have maintained our liquidity position through secured debt financings, cash-generating asset sales and asset dispositions at or below the debt in cooperation with our lenders, as well as reductions in leasing costs, discretionary capital expenditures, property operating expenses, and general and administrative expenses.

Sources and Uses of Liquidity

Our potential liquidity sources and uses are, among others, as follows:

 
 
Sources
 
 
Uses
 
Unrestricted and restricted cash;
 
Property operations and corporate expenses;
 
Cash generated from operations;
 
Capital expenditures (including commissions and tenant improvements);
 
Asset dispositions;
 
Payments in connection with loans (including debt service, principal payment obligations and payments to extend, refinance or exit loans);
 
Proceeds from public or private issuance of debt or equity securities;
 
Entitlement-related costs; and/or
 
Cash generated from the contribution of existing assets to joint ventures; and/or
 
Distributions to common and preferred stockholders and unit holders.
 
Proceeds from additional secured or unsecured debt financings.
 
 
 

Potential Sources of Liquidity

We are working to address challenges to our liquidity position, particularly debt maturities, leasing costs and capital expenditures. We do not currently have committed sources of cash adequate to fund all of our potential needs, including 2013 debt maturities with respect to our US Bank Tower, KPMG Tower and 777 Tower mortgage loans. If we are unable to raise additional capital or sell assets, we may face challenges in repaying, extending or refinancing our existing debt, including our debt maturities at US Bank Tower, KPMG Tower and 777 Tower on favorable terms or at all, and we may be forced to give back one or more of these assets to the relevant mortgage lenders. While we believe that access to future sources of significant cash will be challenging, we believe that we will have access to some of the liquidity sources identified above, and that those sources will be sufficient to meet our near-term liquidity needs.

Our ability to sell our properties to raise capital is not assured. Companies known to be liquidating assets in order to fund liquidity needs may lose negotiation and pricing power. Accordingly, if we are forced to sell properties to meet our liquidity requirements, the sale prices may reflect discounts to fair value. We also believe that the concentration of our properties in downtown Los Angeles creates operating and leasing synergies that

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MPG OFFICE TRUST, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

enhance the value of our company. Selling properties on a one-off basis to fund liquidity needs, therefore, may diminish those synergies and decrease the value of our remaining portfolio of properties. Our tax basis in each of our properties is substantially less than the value of those properties and, in some cases, the amount of indebtedness encumbering those properties. Accordingly, asset sales may cause us to become liable for material taxes. Asset sales also could require us to incur potentially significant transaction expenses, even if our efforts to sell an asset are not successful. In addition, asset sales typically take significantly longer to complete than issuances of debt or equity securities, exposing us to additional market and economic risks.

Our ability to access the capital markets to raise capital is highly uncertain. Our substantial indebtedness may prevent us from being able to raise debt financing on acceptable terms, or at all. We believe we are unlikely to be able to raise equity capital in the capital markets.

Future sources of significant cash are essential to our liquidity and financial position, and if we are unable to generate adequate cash from these sources we will have liquidity-related problems and will be exposed to material risks. In addition, our inability to secure adequate sources of liquidity could lead to our eventual insolvency. For a further discussion of risks associated with (among other matters) loan defaults, economic conditions, our liquidity position and our substantial indebtedness, see “Risk Factors” contained in this supplement and Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K filed with the SEC on March 15, 2012.

Unrestricted and Restricted Cash

A summary of our cash position as of September 30, 2012 is as follows (in millions):

Unrestricted cash and cash equivalents
$
117.4

Restricted cash:
 
Leasing and capital expenditure reserves
14.1

Tax, insurance and other working capital reserves
15.3

Prepaid rent reserves
11.2

Collateral accounts
0.6

Total restricted cash, excluding mortgages in default
41.2

Total restricted cash and unrestricted cash and cash equivalents,
     excluding mortgages in default
158.6

Restricted cash of mortgages in default
31.8

 
$
190.4


The leasing and capital expenditure, tax, insurance and other working capital, and prepaid rent reserves are held in restricted accounts by our lenders in accordance with the terms of our mortgage loan agreements. The collateral accounts are held by our counterparties under other obligations.


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MPG OFFICE TRUST, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

The following is a summary of our available leasing reserves (excluding mortgages in default) as of September 30, 2012 (in millions):

 
Restricted
Cash Accounts
LACBD properties
$
12.4

Plaza Las Fuentes
0.1

 
$
12.5


Other than at KPMG Tower, the leasing reserves at our LACBD properties have been exhausted in large part, and future leasing costs will need to be funded primarily from property-generated cash flow.

Cash Generated from Operations

Our cash generated from operations is primarily dependent upon (1) the occupancy level of our portfolio, (2) the rental rates achieved on our leases, and (3) the collectability of rent from our tenants. Net cash generated from operations is tied to our level of operating expenses and other general and administrative costs, described below under “—Potential Uses of Liquidity.”

Occupancy levels. Our overall occupancy levels in the LACBD as of September 30, 2012 are lower than our year end 2011 levels. We expect our occupancy levels in 2013 to be flat or lower than current levels for the following reasons (among others):

We are experiencing aggressive competition from other property owners.

Some of our current tenants are downsizing their space upon renewal.

Our perceived liquidity challenges and recent loan defaults may have impacted potential tenants’ willingness to enter into leases with us.

Economic conditions and stock market volatility have resulted in some companies shifting to a more cautionary mode with respect to leasing office space.

Some of our current and potential tenants rely heavily on the availability of financing to support operating costs (including rent).

We face competition from high-quality sublease space, particularly in the LACBD.

For a discussion of other factors that may affect our ability to sustain or improve our occupancy levels, see “Risk Factors” contained in this supplement and Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10K filed with the SEC on March 15, 2012.

Rental rates. Average asking rental rates in the LACBD were essentially flat during the nine months ended September 30, 2012. On average, our in-place rents are generally close to current market in the LACBD and above market at Plaza Las Fuentes. Because of economic volatility and uncertainty, rental rates may decline during 2013.


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MPG OFFICE TRUST, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Collectability of rent from our tenants. Our rental revenue depends on collecting rent from tenants, and in particular from our major tenants. As of September 30, 2012, our 20 largest tenants represented 55.0% of the LACBD’s total annualized rental revenue. In the event of tenant defaults, we may experience delays in enforcing our rights as landlord and may incur substantial costs in pursuing legal possession of the tenant’s space and recovery of any amounts due to us from the tenant. This is particularly true in the case of the bankruptcy or insolvency of a major tenant or where the Federal Deposit Insurance Corporation is acting as receiver.

Asset Dispositions

During the past several years, we have systematically disposed of assets in order to (1) preserve cash, through the disposition of properties with current or projected negative cash flow and/or other potential near-term cash outlay requirements (including debt maturities) and (2) generate cash, through the disposition of strategically‑identified non-core properties with positive equity value.

Cash-Preserving Dispositions—

During 2011, we disposed of development land and 1.7 million square feet of office space. These transactions resulted in the elimination of $483.8 million of debt and the generation of $20.3 million in net proceeds (after the repayment of debt).

During the nine months ended September 30, 2012, we closed the following cash-preserving transactions:

On February 2, 2012, trustee sales were held with respect to 700 North Central and 801 North Brand as part of cooperative foreclosure proceedings. As a result of the foreclosures, we were relieved of the obligation to repay the $27.5 million mortgage loan secured by 700 North Central and the $75.5 million mortgage loan secured by 801 North Brand as well as accrued contractual and default interest on both loans. In addition, we received a general release of claims under the loan documents pursuant to previous in-place agreements with the special servicer.

On April 19, 2012, we disposed of Brea Corporate Place and Brea Financial Commons (“Brea Campus”) pursuant to a deed-in-lieu of foreclosure agreement. As a result, we were relieved of the obligation to repay the $109.0 million mortgage loan secured by these properties as well as accrued contractual interest on the mortgage loan. In addition, we received a general release of claims under the loan documents.
On May 18, 2012, trustee sales were held with respect to Stadium Towers Plaza and an adjacent land parcel. As a result of the foreclosures, we were relieved of the obligation to repay the $100 million mortgage loan secured by the properties as well as accrued contractual and default interest on the mortgage loan. In addition, we received a general release of claims under the loan documents pursuant to a previous in-place agreement with the special servicer.

On August 3, 2012, a trustee sale was held with respect to Glendale Center. As a result of the foreclosure, we were relieved of the obligation to repay the $125.0 million mortgage loan secured by the property as well as accrued contractual and default interest on the mortgage loan. In addition, we received a general release of claims under the loan documents pursuant to a previous in-place agreement with the special servicer.


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MPG OFFICE TRUST, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

On September 6, 2012, a trustee sale was held with respect to 500 Orange Tower. As a result of the foreclosure, we were relieved of the obligation to repay the $110.0 million mortgage loan secured by the property as well as accrued contractual and default interest on the mortgage loan. In addition, we received a general release of claims under the loan documents pursuant to a previous in-place agreement with the special servicer.

We have exited, have entered into agreements to exit and may potentially exit additional non-core assets during the remainder of 2012 and 2013:

On October 1, 2012, a trustee sale was held with respect to Two California Plaza. As a result of the foreclosure, we were relieved of the obligation to repay the $470.0 million mortgage loan secured by the property as well as accrued contractual and default interest on the mortgage loan. In addition, we received a general release of claims under the loan documents pursuant to a previous in-place agreement with the special servicer. See “Subsequent Event.”

We have entered into an agreement with the special servicer for 3800 Chapman pursuant to which the Company will temporarily remain the title holder of the asset until it is transferred to another party or there is a completed foreclosure, with a definitive outside date of December 31, 2012, by which time we will cease to own the asset. We are not obligated to pay any amounts and are not subject to any liability or obligation in connection with our exit from the asset, other than to cooperate in the sale or other disposition. We will receive a general release of claims under the loan documents at the time of exit. Also pursuant to this agreement, our Operating Partnership received a release from all claims under the guaranty of partial payment.

Cash-Generating Dispositions—

During the nine months ended September 30, 2012, we closed the following cash-generating transactions:

On March 30, 2012, we sold our interests in Wells Fargo Center – Denver and San Diego Tech Center (both joint venture properties in which we owned a 20% interest) to affiliates of Beacon Capital Partners, LLC (“Beacon Capital”). In addition, we sold our development rights and an adjacent land parcel at San Diego Tech Center to Beacon Capital and received a payment in consideration for terminating our right to receive certain fees from the joint venture following the closing date. We received net proceeds from these transactions totaling approximately $45 million, which will be used for general corporate purposes.

On May 25, 2012, we disposed of the City Tower development land. We received net proceeds of approximately $7 million, which will be used for general corporate purposes.

On July 12, 2012, we sold our interest in Stadium Gateway (a joint venture property in which we owned a 20% interest). We received net proceeds of approximately $1 million, including reimbursement of loan reserves, which will be used for general corporate purposes.

We do not anticipate any substantial cash-generating dispositions in the near term, and we have a very limited number of assets remaining that could be sold to generate net cash proceeds. Although not currently contemplated, we currently believe that we could sell 777 Tower and the adjacent 755 South Figueroa land parcel to generate net cash proceeds. However, if we choose to pursue such a disposition, we cannot assure you that such a disposition could be completed in a timely manner or on terms acceptable to us.


11



MPG OFFICE TRUST, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

In connection with our initial public offering, we agreed to indemnify Robert F. Maguire III and related entities and other contributors from all direct and indirect adverse tax consequences in the event that our Operating Partnership directly or indirectly sells, exchanges or otherwise disposes (including by way of merger, sale of assets, completion of a foreclosure or otherwise) of any portion of its interests in certain properties in a taxable transaction. Certain types of transactions, including but not limited to joint ventures and refinancings, can be structured to avoid triggering the tax indemnification obligations.

As a condition to the continuation of the tax indemnification period to its maximum length, Mr. Maguire and related entities must maintain ownership of noncontrolling common units (or shares of common stock received by Mr. Maguire and related entities in exchange for noncontrolling common units of our Operating Partnership in accordance with Section 8.6B of the Amended and Restated Agreement of Limited Partnership of MPG Office, L.P., as amended) of our Operating Partnership equal to 50% of the units received by them in the formation transactions. As of the measurement date, Mr. Maguire met the 50% ownership requirement and the tax indemnification periods were extended to June 27, 2013.

On July 23, 2012, we received notices from Mr. Maguire and related entities requesting the redemption of 3,975,707 noncontrolling common units. On July 24, 2012, we issued 3,975,707 shares of common stock in exchange for these units. At Mr. Maguire’s request, we issued the common stock to a party not related to Mr. Maguire. The redemption of these units and subsequent issuance of the common stock to a party not related to Mr. Maguire causes Robert F. Maguire III and related entities to fall below the 50% ownership requirement set forth in his contribution agreement. As a result, all tax indemnification in favor of him and related entities, as well as all remaining limited partners, now expires on June 27, 2013. Therefore, pursuant to the terms of the contribution agreement, all restrictions on disposition relating to the following assets now expire on June 27, 2013: Gas Company Tower, US Bank Tower, KPMG Tower, Wells Fargo Tower and Plaza Las Fuentes.

Proceeds from Public or Private Issuance of Debt or Equity Securities

Due to market conditions and our high leverage level, among other factors, it would be extremely difficult to raise cash through public or private issuance of debt or equity securities on favorable terms or at all. In the event of a successful issuance, existing equity holders would likely face substantial dilution.

Cash Generated from the Contribution of Existing Assets to Joint Ventures

Although not currently planned or contemplated, in the long term we may seek to raise capital by contributing one or more of our existing assets to a joint venture with a third party. Investments in joint ventures are typically complicated and may, under certain circumstances, involve risks not present were a third party not involved. Our ability to successfully identify, negotiate and close joint venture transactions on acceptable terms or at all is highly uncertain in the current economic environment.

Proceeds from Additional Secured or Unsecured Debt Financings

We do not currently have arrangements for any future secured financings and do not expect to obtain any secured debt financings in the near term that will generate net cash proceeds. We currently do not believe that we will be able to address challenges to our liquidity position (particularly debt maturities, leasing costs and capital expenditures) through future secured debt financings. Additionally, we do not believe that we will be able to obtain any significant unsecured financings on terms acceptable to us in the near future.


12



MPG OFFICE TRUST, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Potential Uses of Liquidity

The following are the projected uses, and some of the potential uses, of our cash in the near term. Because of the current uncertainty in the real estate market and the economy as a whole, there may be other uses of our cash that are unexpected (and that are not identified below).

Property Operations and Corporate Expenses

Management is focused on a careful and efficient use of cash to fund property operating and corporate expenses. All of our business units underwent a thorough budgeting process in the fourth quarter of 2011 to allow for support of the Company’s 2012 business plan, while preserving unrestricted cash. Management continues to look for opportunities to reduce general and administrative expenses. Our completed and any future property dispositions may further reduce these expenses. Regardless of these efforts, operating our properties and business requires a significant amount of capital.

Capital Expenditures (Including Commissions and Tenant Improvements)

Capital expenditures fluctuate in any given period, subject to the nature, extent and timing of improvements required to maintain our properties. Leasing costs also fluctuate in any given period, depending upon such factors as the type of property, the length of the lease, the type of lease, the involvement of external leasing agents and overall market conditions. Our costs for capital expenditures and leasing fall into two categories: (1) amounts that we are contractually obligated to spend and (2) discretionary amounts.

As of September 30, 2012, we had executed leases (excluding those related to mortgages in default) that contractually commit us to pay $41.5 million for leasing costs, of which $14.0 million is contractually due in 2013, $1.0 million in 2014, $6.2 million in 2015, $0.5 million in 2016 and $11.7 million in 2017 and thereafter. The remaining $8.1 million is contractually available for payment to tenants upon request during 2012, but actual payment is largely determined by the timing of requests from those tenants.

We continue to have limited unrestricted cash. We may limit the amount of discretionary funds allocated to capital expenditures and leasing costs in the near or longer term. If this occurs, it may result in a decrease in the number of leases we execute (particularly new leases, which are generally more costly to us than renewals) and average rental rates. In addition, for leases that we do execute, we expect to pay standard tenant concessions.

As included in the summary table of available leasing reserves shown above, we have $12.5 million in available leasing reserves as of September 30, 2012. At our LACBD properties, we incurred approximately $57 per square foot, $30 per square foot and $30 per square foot in leasing costs on new and renewal leases executed during the nine months ended September 30, 2012 and the years ended December 31, 2011 and 2010, respectively. Actual leasing costs incurred will fluctuate as described above.

Payments in Connection with Loans

Debt Service. As of September 30, 2012, we had $2.5 billion of total consolidated debt, including $0.5 billion of debt associated with mortgages in default (as described below). Our substantial indebtedness requires us to use a material portion of our cash flow to service principal and interest on our debt, which limits the cash flow available for other business expenses and opportunities. The lockbox and cash management arrangements contained in our loan agreements require that substantially all of the income generated by our special purpose property-owning subsidiaries be deposited directly into lockbox accounts and then swept into cash management accounts for the benefit of our lenders. With the exception of the mortgages in default, cash is

13



MPG OFFICE TRUST, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

distributed to us only after funding of improvement, leasing and maintenance reserves and the payment of debt service, insurance, taxes, operating expenses, and extraordinary capital expenditures and leasing expenses. In addition, effective September 9, 2012, excess operating cash flow from KPMG Tower is being swept by the lender to fund capital expenditure and leasing reserves and to reduce the principal balance of the mortgage loan. As of September 30, 2012, we have fully funded the $1.5 million capital expenditure reserve and have funded $0.6 million of the $5.0 million leasing reserve.

During the nine months ended September 30, 2012, we made debt service payments totaling $87.5 million, and the respective special servicers of the mortgages in default applied $8.2 million of restricted cash held at the property level to pay contractual interest on the mortgage loans secured by Two California Plaza, 500 Orange Tower and 3800 Chapman. We made no debt service payments with unrestricted cash during the nine months ended September 30, 2012 related to mortgages in default subsequent to the applicable default date.

Certain of our special purpose property-owning subsidiaries were in default as of September 30, 2012 under commercial mortgage-backed securities (“CMBS”) mortgages totaling $514.4 million secured by Two California Plaza and 3800 Chapman. We remained the title holder on each of these assets as of September 30, 2012. On October 1, 2012, a trustee sale was held with respect to Two California Plaza pursuant to which we were relieved of the obligation to repay the $470.0 million mortgage loan secured by the property as well as accrued contractual and default interest on the mortgage loan. In addition, we received a general release of claims under the loan documents pursuant to a previous in-place agreement with the special servicer. See “Subsequent Event.” We have entered into an agreement with the special servicer for 3800 Chapman pursuant to which the Company will temporarily remain the title holder of the asset until it is transferred to another party or there is a completed foreclosure, with a definitive outside date of December 31, 2012, by which time we will cease to own the asset. We are not obligated to pay any amounts and are not subject to any liability or obligation in connection with our exit from the asset, other than to cooperate in the sale or other disposition. We will receive a general release of claims under the loan documents at the time of exit.

Principal Payment Obligations. As our debt matures, our principal payment obligations present significant future cash requirements. We may not be able to successfully extend, refinance or repay our debt depending upon a number of factors, including property valuations, availability of credit, lending standards and economic conditions. We do not have any committed financing sources available to refinance our debt as it matures. For a further discussion of our debt’s effect on our financial condition and operating flexibility, see “Risk Factors” contained in this supplement and Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K filed with the SEC on March 15, 2012.

As of September 30, 2012, a summary of our debt maturing in 2013 is as follows (in millions):

KPMG Tower
$
365.0

777 Tower
273.0

US Bank Tower
260.0

Principal payable at maturity
$
898.0


Our KPMG Tower mortgage loan matures on October 9, 2013. We do not have a commitment from the lenders to extend further the maturity date of this loan. Further extension or refinancing of the loan may require a paydown (depending on market conditions), funding of additional reserve amounts, or both. We have not yet identified the capital source or sources required to enable us to make any such payments. If we are unable to raise additional capital or sell assets, we may face challenges in repaying, extending or refinancing this loan on favorable terms or at all, and we may be forced to give back the asset to the lenders. We are subject to tax indemnification

14



MPG OFFICE TRUST, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

obligations to Mr. Maguire and other contributors with respect to KPMG Tower, and these obligations could be triggered if we dispose of KPMG Tower in a taxable transaction, including through completion of a foreclosure, prior to June 27, 2013. On July 23, 2012, we received notices from Mr. Maguire and related entities requesting the redemption of 3,975,707 noncontrolling common units. On July 24, 2012, we issued 3,975,707 shares of common stock in exchange for the redeemed units to a party other than Mr. Maguire. As a result, the tax indemnification period for this property now expires on June 27, 2013. We do not currently intend to take any actions that would trigger the tax indemnification obligations with respect to KPMG Tower.

Our US Bank Tower and 777 Tower mortgage loans mature in July 1, 2013 and November 1, 2013, respectively. We do not have a commitment from the respective lenders to extend the maturity dates of these loans. These loans may require a paydown upon extension or refinancing (depending on market conditions), funding of additional reserve amounts, or both. We have not yet identified the capital source or sources required to enable us to make any such payments. If we are unable to raise additional capital or sell assets, we may face challenges in repaying, extending or refinancing these loans on favorable terms or at all, and we may be forced to give back one or both of the assets to the respective lenders. We are subject to tax indemnification obligations to Mr. Maguire and other contributors with respect to US Bank Tower, and these obligations could be triggered if we dispose of US Bank Tower in a taxable transaction, including through completion of a foreclosure, prior to June 27, 2013. As a result of the redemption of noncontrolling common units held by Mr. Maguire and related entities discussed above, the tax indemnification period for US Bank Tower now expires on June 27, 2013. We do not currently intend to take any actions that would trigger the tax indemnification obligations with respect to US Bank Tower.

Payments to Extend, Refinance, Modify or Exit Loans. We continue to have limited unrestricted cash. Upcoming debt maturities present cash obligations that the relevant special purpose property-owning subsidiary obligor may not be able to satisfy. For assets that we do not or cannot dispose of and for which the relevant property-owning subsidiary is unable or unwilling to fund the resulting obligations, we may seek to extend or refinance the applicable loans or may default upon such loans. Recently, extending or refinancing loans has required principal paydowns, the funding of additional reserve amounts and the payment of certain fees to, and expenses of, the applicable lenders. These fees and cash flow restrictions will affect our ability to fund our other liquidity uses. In addition, the terms of the extensions or refinancings may include significantly restrictive operational and financial covenants. The default by the relevant special purpose property-owning subsidiary obligor upon any such loans could result in foreclosure of the property.

Entitlement-Related Costs

We periodically evaluate the size, timing, costs and scope of our entitlement-related work and, as necessary, scale activity to reflect our financial position, overall economic conditions and the real estate fundamentals that exist in our submarkets. We expect to allocate a limited amount of cash towards pursuing and preserving entitlements during the near term.

Distributions to Common and Preferred Stockholders and Unit Holders

We are required to distribute 90% of our REIT taxable income (excluding net capital gains) on an annual basis in order to qualify as a REIT for federal income tax purposes.

As of December 31, 2011, we had approximately $1.1 billion of federal net operating loss (“NOL”) carryforwards, of which approximately $842 million relate to MPG Office Trust, Inc. and $209 million relate to our taxable REIT subsidiaries. Due to our focus on preserving our unrestricted cash and the availability of substantial NOL carryforwards to offset future taxable income, we do not expect to pay distributions on our common stock and Series A preferred stock for the foreseeable future. We do not expect the need to pay distributions to our

15



MPG OFFICE TRUST, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

stockholders during 2012 to maintain our REIT status due to the use of NOL carryforwards, as necessary. In determining REIT taxable income for purposes of applying the 90% distribution requirement, NOL carryforwards can be taken into account.

On December 19, 2008, our board of directors suspended the payment of dividends on our Series A preferred stock. Dividends on our Series A preferred stock are cumulative, and therefore, will continue to accrue at an annual rate of $1.9064 per share. As of October 31, 2012, we have missed 16 quarterly dividend payments. The amount of dividends in arrears totals $74.2 million.

All distributions to our common stockholders, preferred stockholders and Operating Partnership common unit holders are at the discretion of the board of directors. The actual amount and timing of distributions in 2012 and beyond, if any, will be at the discretion of our board of directors and will depend upon our financial condition in addition to the requirements of the Internal Revenue Code of 1986, as amended (the “Code”), and no assurance can be given as to the amounts or timing of future distributions.

Tax Basis of Operating Partnership Assets—

Selected information, including federal net tax basis amounts, for the Operating Partnership’s assets as of September 30, 2012 is as follows (in millions):

Property
 
OP Asset Tax Basis (Adjusted for Depreciation) (1)
 
Section 704(c) Built-in Gain Allocable to Limited Partners (1)
 
Section 704(c) Built-in Gain Allocable
to MPG (1)
 
Additional MPG Section 743(b) Basis (Adjusted for Depreciation)
Wholly Owned Properties:
 
 
 
 
 
 
 
 
Wells Fargo Tower
 
$
218.4

 
$
8.9

 
$
85.9

 
$
123.0

777 Tower
 
316.1

 

 

 
7.7

US Bank Tower
 
159.4

 
21.5

 
106.7

 
145.7

Gas Company Tower
 
200.6

 
27.5

 
32.1

 
75.2

KPMG Tower
 
84.5

 
7.3

 
195.3

 
165.9

Plaza Las Fuentes
 
17.3

 
0.2

 
24.9

 
27.8

Other
 
3.6

 

 

 

Total wholly owned properties
 
999.9

 
65.4

 
444.9

 
545.3

 
 
 
 
 
 
 
 
 
Joint Venture Properties: (2)
 
 
 
 
 
 
 
 
One California Plaza (3)
 
39.2

 
0.2

 
82.2

 
3.7

Cerritos Corporate Center
 
16.6

 

 

 
(0.7
)
Total joint venture properties
 
55.8

 
0.2

 
82.2

 
3.0

 
 
$
1,055.7

 
$
65.6

 
$
527.1

 
$
548.3

__________
(1)
Any remaining gain in excess of the Section 704(c) built-in gains listed above would be allocated to MPG Office Trust, Inc. and the limited partners of the Operating Partnership at their respective ownership percentages. As of September 30, 2012, those percentages are 99.7% and 0.3%, respectively.
(2)
These amounts represent our pro-rata 20% interest in the unconsolidated joint venture’s total adjusted tax basis in the respective asset shown.
(3)
The Operating Partnership has a Section 704(c) built-in gain of $82.4 million (shown above) in One California Plaza as of September 30, 2012. The joint venture has elected to use the remedial method with respect to the Section 704(c) gain in One California Plaza. This built-in gain must be considered in determining any gain allocable to the Operating Partnership if One California Plaza is sold or otherwise disposed.


16



MPG OFFICE TRUST, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

As of September 30, 2012, our Operating Partnership also has tax basis in the stock of its three wholly owned TRS entities (in millions):

 
Tax Basis in TRS Stock
MPG TRS Holdings, Inc.
$
95

MPG TRS Holdings II, Inc.
121

MPG Office Trust Services, Inc.
16


Indebtedness

Mortgage Loans

As of September 30, 2012, our consolidated debt was comprised of mortgage and mezzanine loans secured by eight properties. Our variable-rate debt bears interest at a rate based on one-month LIBOR, which was 0.21% as of September 30, 2012. A summary of our consolidated debt as of September 30, 2012 is as follows (in millions, except percentage and year amounts):

 
Principal
Amount
 
Percent of
Total Debt
 
Effective
Interest
Rate
 
Weighted Average
Term to
Maturity
Fixed-rate
$
1,552.2

 
62.98
%
 
5.40
%
 
3 years
Variable-rate
398.2

 
16.15
%
 
3.55
%
 
1 year
Total debt, excluding mortgages in default
1,950.4

 
79.13
%
 
5.02
%
 
3 years
Mortgages in default
514.4

 
20.87
%
 
10.54
%
 
 
 
$
2,464.8

 
100.00
%
 
6.17
%
 
 

As of September 30, 2012, our ratio of total consolidated debt to total consolidated market capitalization was 85.0% of our total market capitalization of $2.9 billion (based on the closing price of our common stock of $3.35 per share on The New York Stock Exchange (“NYSE”) on September 28, 2012). Our ratio of total consolidated debt plus liquidation preference of the Series A preferred stock to total consolidated market capitalization was 93.4% as of September 30, 2012. Our total consolidated market capitalization includes the book value of our consolidated debt, the $25.00 liquidation preference of 9.7 million shares of Series A preferred stock and the market value of our outstanding common stock and noncontrolling common units of our Operating Partnership as of September 28, 2012.


17



MPG OFFICE TRUST, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Certain information with respect to our indebtedness as of September 30, 2012 is as follows (in thousands, except percentage amounts):

 
Interest
Rate
 
Contractual
Maturity Date
 
Principal
Amount (1)
 
Annual
Debt
Service
Variable-Rate Debt (2)
 
 
 
 
 
 
 
Plaza Las Fuentes mortgage loan (3)
4.50
%
 
8/9/2016
 
$
33,171

 
$
1,513

KPMG Tower A-Note (4)
3.21
%
 
10/9/2013
 
320,800

 
10,455

KPMG Tower B-Note (5)
5.31
%
 
10/9/2013
 
44,200

 
2,382

Total variable-rate debt
 
 
 
 
398,171

 
14,350

 
 
 
 
 
 
 
 
Fixed-Rate Debt
 
 
 
 
 
 
 
Wells Fargo Tower
5.68
%
 
4/6/2017
 
550,000

 
31,649

Gas Company Tower
5.10
%
 
8/11/2016
 
458,000

 
23,692

777 Tower
5.84
%
 
11/1/2013
 
273,000

 
16,176

US Bank Tower
4.66
%
 
7/1/2013
 
260,000

 
12,284

Plaza Las Fuentes mezzanine loan
9.88
%
 
8/9/2016
 
11,250

 
1,111

Total fixed-rate rate debt
 
 
 
 
1,552,250

 
84,912

Total debt, excluding mortgages in default
 
 
 
 
1,950,421

 
99,262

 
 
 
 
 
 
 
 
Mortgages in Default
 
 
 
 
 
 
 
Two California Plaza (6)
10.50
%
 
5/6/2017
 
470,000

 
50,034

3800 Chapman (7)
10.93
%
 
5/6/2017
 
44,370

 
4,915

Total mortgages in default
 
 
 
 
514,370

 
54,949

Total consolidated debt
 
 
 
 
2,464,791

 
$
154,211

Debt discount
 
 
 
 
(707
)
 
 
Total consolidated debt, net
 
 
 
 
$
2,464,084

 
 
__________
(1)
Assuming no payment has been made in advance of its due date.
(2)
The September 30, 2012 one-month LIBOR rate of 0.21% was used to calculate interest on the variable-rate loans.
(3)
This loan bears interest at a rate of the greater of 4.50%, or LIBOR plus 3.50%. As required by the Plaza Las Fuentes mezzanine loan agreement, we have entered into an interest rate cap agreement that limits the LIBOR portion of the interest rate to 2.50%.
(4)
This loan bears interest at a rate of LIBOR plus 3.00% (the rate in effect beginning on October 10, 2012 per the terms of the amended loan). Annual debt service is calculated using the interest rate in effect as of October 10, 2012.
(5)
This loan bears interest at a rate of LIBOR plus 5.10% (the rate in effect beginning on October 10, 2012 per the terms of the amended loan). Annual debt service is calculated using the interest rate in effect as of October 10, 2012.
(6)
As of September 30, 2012, our special purpose property-owning subsidiary that owned Two California Plaza was in default under this loan. The interest rate shown for this loan was the default rate as defined in the loan agreement. On October 1, 2012, a trustee sale was held with respect to Two California Plaza pursuant to which the property was disposed. See “Subsequent Event.” As a result of the foreclosure, we were relieved of the obligation to repay the mortgage loan secured by the property.
(7)
Our special purpose property-owning subsidiary that owns 3800 Chapman is in default under this loan. The interest rate shown for this loan is the default rate as defined in the loan agreement. The special servicer has the contractual right to accelerate the maturity of the debt but has not done so. The special servicer has placed the property in receivership. The actual settlement date of the loan will depend upon when the property is disposed, with a definitive outside date of December 31, 2012. Management does not intend to settle this amount with unrestricted cash. We expect this amount to be settled in a non-cash manner at the time of disposition.


18



MPG OFFICE TRUST, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Mortgage Loan Extension

On July 9, 2012, we extended the maturity date of the mortgage loan at KPMG Tower for an additional one year, to October 9, 2013. In connection with the extension, we repaid $35.0 million of principal, which reduced the outstanding loan balance to $365.0 million. Additionally, we funded a $5.0 million leasing reserve and agreed to a full cash sweep of excess operating cash flow which began on September 9, 2012. Excess operating cash flow (cash flow after the funding of certain reserves, the payment of property operating expenses and the payment of debt service) is being applied to fund a $1.5 million capital expenditure reserve, to fund an additional $5.0 million into the leasing reserve, and thereafter, to reduce the outstanding principal balance of the loan. As of September 30, 2012, we have fully funded the capital expenditure reserve and have funded $0.6 million of the additional leasing reserve.

Mortgage Loans Settled Upon Disposition

Glendale Center—

On August 3, 2012, a trustee sale was held with respect to Glendale Center. As a result of the foreclosure, we were relieved of the obligation to repay the $125.0 million mortgage loan secured by the property as well as accrued contractual and default interest on the mortgage loan. In addition, we received a general release of claims under the loan documents pursuant to a previous in-place agreement with the special servicer. We recorded a $13.7 million gain on settlement of debt as part of discontinued operations as a result of the difference between the fair value assigned to the properties in the transaction and the amounts forgiven by the lender upon disposition.

500 Orange Tower—

On September 6, 2012, a trustee sale was held with respect to 500 Orange Tower. As a result of the foreclosure, we were relieved of the obligation to repay the $110.0 million mortgage loan secured by the property as well as accrued contractual and default interest on the mortgage loan. In addition, we received a general release of claims under the loan documents pursuant to a previous in-place agreement with the special servicer. We recorded a $65.7 million gain on settlement of debt as part of discontinued operations as a result of the difference between the fair value assigned to the property in the transaction and the amounts forgiven by the lender upon disposition.

Mortgages in Default

A summary of our mortgages in default as of September 30, 2012 is as follows (in thousands):

Two California Plaza (1)
$
470,000

3800 Chapman
44,370

 
$
514,370

__________
(1)
On October 1, 2012, a trustee sale was held with respect to Two California Plaza pursuant to which the property was disposed. See “Subsequent Event.” As a result of the foreclosure, we were relieved of the obligation to repay the mortgage loan secured by the property.



19



MPG OFFICE TRUST, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

The interest expense recorded as part of continuing operations in our consolidated statements of operations related to mortgages in default is as follows (in thousands):

 
 
 
 
For the Nine Months Ended
 
 
 
 
September 30, 2012
 
September 30, 2011
Property
 
Initial Default Date
 
Contractual
Interest
 
Default
Interest
 
Contractual
Interest
 
Default
Interest
Two California Plaza (1)
 
March 7, 2011
 
$
19,674

 
$
17,886

 
$
14,935

 
$
13,773

3800 Chapman
 
June 6, 2012
 
847

 
715

 

 

 
 
 
 
$
20,521

 
$
18,601

 
$
14,935

 
$
13,773

___________
(1)
On October 1, 2012, a trustee sale was held with respect to Two California Plaza pursuant to which the property was disposed. See “Subsequent Event.” As a result of the foreclosure, we were relieved of the obligation to pay the accrued contractual and default interest on the mortgage loan.

Amounts shown in the table above reflect interest expense recorded subsequent to the initial default date.

We have entered into an agreement with the special servicer for 3800 Chapman pursuant to which the Company will temporarily remain the title holder of the asset until it is transferred to another party or there is a completed foreclosure, with a definitive outside date of December 31, 2012, by which time we will cease to own the asset. We are not obligated to pay any amounts and are not subject to any liability or obligation in connection with our exit from the asset, other than to cooperate in the sale or other disposition. We will receive a general release of claims under the loan documents at the time of exit. Management does not intend to settle this amount with unrestricted cash. We expect this amount to be settled in a non-cash manner at the time of disposition.

Operating Partnership Contingent Obligations

Non-Recourse Carve Out Guarantees—

All of the Company’s $2.5 billion of consolidated debt is subject to “non-recourse carve out” guarantees that expire upon elimination of the underlying loan obligations. Under these guarantees, these otherwise non‑recourse loans can become partially or fully recourse against our Operating Partnership if certain triggering events occur. Although these events differ from loan to loan, some of the common events include:

The special purpose property-owning subsidiary’s or our Operating Partnership’s filing a voluntary petition for bankruptcy;

The special purpose property-owning subsidiary’s failure to maintain its status as a special purpose entity;

Subject to certain conditions, the special purpose property-owning subsidiary’s failure to obtain the lender’s written consent prior to any subordinate financing or other voluntary lien encumbering the associated property; and

Subject to certain conditions, the special purpose property-owning subsidiary’s failure to obtain the lender’s written consent prior to a transfer or conveyance of the associated property, including, in some cases, indirect transfers in connection with a change in control of our Operating Partnership or the Company.


20



MPG OFFICE TRUST, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

In addition, other items that are customarily recourse to a non-recourse carve out guarantor include, but are not limited to, the payment of real property taxes, the breach of representations related to environmental issues or hazardous substances, physical waste of the property, liens which are senior to the mortgage loan and outstanding security deposits.

As of September 30, 2012, to our knowledge the Company had not triggered any of the “non-recourse carve out” guarantees on its otherwise non-recourse loans. The maximum amount our Operating Partnership would be required to pay under a “non-recourse carve out” guarantee is the principal amount of the loan (or a total of $2.5 billion as of September 30, 2012 for all loans). This maximum amount does not include liabilities related to environmental issues or hazardous substances. Losses resulting from the breach of our loan agreement representations related to environmental issues or hazardous substances are generally recourse to our Operating Partnership pursuant to our “non-recourse carve out” guarantees and any such losses would be in addition to the total principal amounts of our loans. The potential losses are not quantifiable and can be material in certain circumstances, depending on the severity of the environmental or hazardous substance issues. Since each of our non-recourse loans is secured by the office building owned by the special purpose property-owning subsidiary, the amount due to the lender from our Operating Partnership in the event a “non-recourse carve out” guarantee is triggered could subsequently be partially or fully mitigated by the net proceeds received from any disposition of the office building; however, such proceeds may not be sufficient to cover the maximum potential amount due, depending on the particular asset.

In the event that any of these triggering events occur and the loans become partially or fully recourse against our Operating Partnership, our business, financial condition, results of operations and common stock price would be materially adversely affected and we could become insolvent.

Debt Reporting

Pursuant to the terms of certain of our mortgage loan agreements, we are required to report a debt service coverage ratio (“DSCR”) calculated using the formulas specified in the underlying loan agreements. We have submitted the required reports to the lenders for the measurement periods ended September 30, 2012. Under the Gas Company Tower mortgage loan, we reported a DSCR of 1.06 to 1.00, calculated using actual debt service under the loan, and a DSCR of 0.84 to 1.00, calculated using actual debt service plus a hypothetical principal payment using a 30‑year amortization schedule. Because the reported DSCR using the actual debt service plus a hypothetical principal payment was less than 1.00 to 1.00, the lender could seek to remove the Company as property manager of Gas Company Tower.

Pursuant to the terms of the Gas Company Tower, KPMG Tower, Plaza Las Fuentes and Wells Fargo Tower mortgage loan agreements and the Plaza Las Fuentes mezzanine loan agreement, we are required to provide annual audited financial statements of MPG Office Trust, Inc. to the lenders or agents. The receipt of any opinion other than an “unqualified” audit opinion on our annual audited financial statements is an event of default under the loan agreements for the properties listed above. If an event of default occurs, the lenders have the right to pursue the remedies contained in the loan documents, including acceleration of all or a portion of the debt and foreclosure.



21



MPG OFFICE TRUST, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Results of Operations

Our results of operations were affected by dispositions made during 2011 and 2012. Therefore, our results are not comparable from period to period. To eliminate the effect of changes in our Total Portfolio due to dispositions, we have separately presented the results of our “Same Properties Portfolio.”

Properties included in our Same Properties Portfolio are the properties in our office portfolio, with the exception of the Properties in Default and our joint venture properties. The results of our Same Properties Portfolio are presented to highlight for investors and users of our consolidated financial statements the operating results of our on-going business. Given the default status of the Properties in Default and our current business plan, management has excluded the results of the Properties in Default from the analysis of our Same Properties Portfolio as they believe the Company ultimately will not bear the benefit or burden of the operating performance of these properties prior to their disposition.

Comparison of the Three Months Ended September 30, 2012 to September 30, 2011

Consolidated Statements of Operations Information
(In millions, except percentage amounts)

 
Same Properties Portfolio
 
Total Portfolio
 
For the Three
Months Ended
 
Increase/
(Decrease)
 
%
Change
 
For the Three
Months Ended
 
Increase/
(Decrease)
 
%
Change
 
9/30/2012
 
9/30/2011
 
 
 
9/30/2012
 
9/30/2011
 
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Rental
$
31.2

 
$
33.9

 
$
(2.7
)
 
(8
)%
 
$
38.4

 
$
41.2

 
$
(2.8
)
 
(7
)%
Tenant reimbursements
16.0

 
16.4

 
(0.4
)
 
(2
)%
 
19.7

 
20.5

 
(0.8
)
 
(4
)%
Parking
6.7

 
6.8

 
(0.1
)
 
(1
)%
 
7.7

 
8.2

 
(0.5
)
 
(6
)%
Management, leasing and
     development services

 

 

 
 %
 
0.4

 
2.6

 
(2.2
)
 
(85
)%
Interest and other
0.1

 
0.1

 

 
100
 %
 
1.5

 
0.6

 
0.9

 
150
 %
Total revenue
54.0

 
57.2

 
(3.2
)
 
(6
)%
 
67.7

 
73.1

 
(5.4
)
 
(7
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Rental property operating
     and maintenance
15.0

 
14.0

 
1.0

 
7
 %
 
19.2

 
17.4

 
1.8

 
10
 %
Real estate taxes
5.0

 
5.1

 
(0.1
)
 
(2
)%
 
6.4

 
6.5

 
(0.1
)
 
(2
)%
Parking
1.8

 
1.9

 
(0.1
)
 
(5
)%
 
2.0

 
2.1

 
(0.1
)
 
(5
)%
General and administrative

 

 

 
 %
 
5.9

 
5.3

 
0.6

 
11
 %
Other expense
0.1

 
0.1

 

 
 %
 
1.8

 
1.8

 

 
 %
Depreciation and amortization
14.5

 
15.7

 
(1.2
)
 
(8
)%
 
19.1

 
21.0

 
(1.9
)
 
(9
)%
Interest
26.9

 
29.5

 
(2.6
)
 
(9
)%
 
40.7

 
42.8

 
(2.1
)
 
(5
)%
Total expenses
63.3

 
66.3

 
(3.0
)
 
(5
)%
 
95.1

 
96.9

 
(1.8
)
 
(2
)%
Loss from continuing operations
     before equity in net income (loss) of
     unconsolidated joint venture
(9.3
)
 
(9.1
)
 
(0.2
)
 
 
 
(27.4
)
 
(23.8
)
 
(3.6
)
 
 
Equity in net income (loss) of
     unconsolidated joint venture

 

 

 
 
 

 
0.2

 
(0.2
)
 
 
Loss from continuing operations
$
(9.3
)
 
$
(9.1
)
 
$
(0.2
)
 
 
 
$
(27.4
)
 
$
(23.6
)
 
$
(3.8
)
 
 
Income from discontinued operations
 
 
 
 
 
 
 
 
$
122.4

 
$
54.0

 
$
68.4

 
 


22



MPG OFFICE TRUST, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Rental Revenue

Same Properties Portfolio rental revenue decreased $2.7 million, or 8%, while Total Portfolio rental revenue decreased $2.8 million, or 7%, for the three months ended September 30, 2012 as compared to September 30, 2011, primarily due to decreases in occupancy as a result of lease expirations and terminations during 2012 at our core properties.

Management, Leasing and Development Services Revenue

Total Portfolio management, leasing and development services revenue decreased $2.2 million, or 85%, for the three months ended September 30, 2012 as compared to September 30, 2011, mainly due to a reduction in leasing commissions earned from the joint venture. Additionally, management and advisory fee revenue earned from the joint venture declined due to fewer properties under management due to the disposition by the joint venture of Wells Fargo Center – Denver and San Diego Tech Center on March 30, 2012.

Interest and Other Revenue

Total Portfolio interest and other revenue increased $0.9 million for the three months ended September 30, 2012 as compared to September 30, 2011, primarily due to recognition of deferred management fee revenue for Stadium Gateway, a joint venture property in which we sold our interest on July 12, 2012.

Rental Property Operating and Maintenance Expense

Same Properties Portfolio rental property operating and maintenance expense increased $1.0 million, or 7%, while Total Portfolio rental operating and maintenance expense increased $1.8 million, or 10%, for the three months ended September 30, 2012 as compared to September 30, 2011, primarily due to increased building repair and maintenance costs across the portfolio combined with higher utility costs resulting from increased occupancy at certain properties.

General and Administrative Expense

Total Portfolio general and administrative expense increased $0.6 million, or 11%, for the three months ended September 30, 2012 as compared to September 30, 2011, mainly due to increased professional services fees.

Depreciation and Amortization Expense

Same Properties Portfolio depreciation and amortization expense decreased $1.2 million, or 8%, while Total Portfolio depreciation and amortization expense decreased $1.9 million, or 9%, for the three months ended September 30, 2012 as compared to September 30, 2011, primarily due to lower amortization of lease-related costs during 2012 as a result of lease terminations in 2011.

Interest Expense

Same Properties Portfolio interest expense decreased $2.6 million, or 9%, while Total Portfolio interest expense decreased $2.1 million, or 5%, for the three months ended September 30, 2012 as compared to September 30, 2011, primarily due to the expiration of the KPMG Tower interest rate swap on August 9, 2012, which was partially offset by interest expense on the Plaza Las Fuentes mezzanine loan that was obtained in the fourth quarter of 2011.


23



MPG OFFICE TRUST, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Discontinued Operations

Our income from discontinued operations of $122.4 million for the three months ended September 30, 2012 was primarily comprised of a $79.4 million gain on settlement of debt and a $45.5 million gain on sale of real estate recorded in connection with the disposition of Glendale Center and 500 Orange Tower. Our income from discontinued operations of $54.0 million for the three months ended September 30, 2011 was primarily comprised of a $62.5 million gain on settlement of debt and a $10.2 million gain on sale of real estate recorded in connection with the disposition of City Tower.

Comparison of the Nine Months Ended September 30, 2012 to September 30, 2011

Consolidated Statements of Operations Information
(In millions, except percentage amounts)

 
Same Properties Portfolio
 
Total Portfolio
 
For the Nine
Months Ended
 
Increase/
(Decrease)
 
%
Change
 
For the Nine
Months Ended
 
Increase/
(Decrease)
 
%
Change
 
9/30/2012
 
9/30/2011
 
 
 
9/30/2012
 
9/30/2011
 
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Rental
$
92.5

 
$
101.8

 
$
(9.3
)
 
(9
)%
 
$
113.9

 
$
123.9

 
$
(10.0
)
 
(8
)%
Tenant reimbursements
46.9

 
48.7

 
(1.8
)
 
(4
)%
 
57.5

 
60.1

 
(2.6
)
 
(4
)%
Parking
20.5

 
20.6

 
(0.1
)
 
 %
 
24.0

 
24.4

 
(0.4
)
 
(2
)%
Management, leasing and
     development services

 

 

 
 %
 
2.2

 
4.7

 
(2.5
)
 
(53
)%
Interest and other
1.1

 
0.2

 
0.9

 
100
 %
 
15.8

 
2.5

 
13.3

 
532
 %
Total revenue
161.0

 
171.3

 
(10.3
)
 
(6
)%
 
213.4

 
215.6

 
(2.2
)
 
(1
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Rental property operating
     and maintenance
41.9

 
41.0

 
0.9

 
2
 %
 
53.0

 
51.1

 
1.9

 
4
 %
Real estate taxes
14.9

 
15.1

 
(0.2
)
 
(1
)%
 
18.5

 
18.9

 
(0.4
)
 
(2
)%
Parking
5.6

 
6.0

 
(0.4
)
 
(7
)%
 
6.1

 
6.5

 
(0.4
)
 
(6
)%
General and administrative

 

 

 
 %
 
17.7

 
17.2

 
0.5

 
3
 %
Other expense
0.2

 
0.2

 

 
 %
 
6.1

 
5.1

 
1.0

 
20
 %
Depreciation and amortization
43.7

 
46.2

 
(2.5
)
 
(5
)%
 
57.6

 
61.0

 
(3.4
)
 
(6
)%
Impairment of long-lived assets

 

 

 
 %
 
2.1

 

 
2.1

 
 
Interest
86.2

 
87.8

 
(1.6
)
 
(2
)%
 
126.8

 
125.0

 
1.8

 
1
 %
Loss from early extinguishment of debt

 
0.2

 
(0.2
)
 
(100
)%
 

 
0.2

 
(0.2
)
 
(100
)%
Total expenses
192.5

 
196.5

 
(4.0
)
 
(2
)%
 
287.9

 
285.0

 
2.9

 
1
 %
Loss from continuing operations
     before equity in net income (loss) of
     unconsolidated joint venture
(31.5
)
 
(25.2
)
 
(6.3
)
 
 
 
(74.5
)
 
(69.4
)
 
(5.1
)
 
 
Equity in net income (loss) of
     unconsolidated joint venture

 

 

 
 
 
14.3

 
(0.1
)
 
14.4

 
 
Loss from continuing operations
$
(31.5
)
 
$
(25.2
)
 
$
(6.3
)
 
 
 
$
(60.2
)
 
$
(69.5
)
 
$
9.3

 
 
Income from discontinued operations
 
 
 
 
 
 
 
 
$
245.9

 
$
198.6

 
$
47.3

 
 

Rental Revenue

Same Properties Portfolio rental revenue decreased $9.3 million, or 9%, while Total Portfolio rental revenue decreased $10.0 million, or 8%, for the nine months ended September 30, 2012 as compared to September 30, 2011, primarily due to decreases in occupancy as a result of lease expirations and terminations during 2011 at our core properties.


24



MPG OFFICE TRUST, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Tenant Reimbursements Revenue

Same Properties Portfolio tenant reimbursements revenue decreased $1.8 million, or 4%, while Total Portfolio tenant reimbursements revenue decreased $2.6 million, or 4%, for the nine months ended September 30, 2012 as compared to September 30, 2011, primarily due to lower occupancy resulting from lease expirations during 2011.

Interest and Other Revenue

Total Portfolio interest and other revenue increased $13.3 million for the nine months ended September 30, 2012 as compared to September 30, 2011, primarily due to a termination payment received from Beacon Capital in connection with the joint venture and recognition of deferred management fee revenue for Stadium Gateway, a joint venture property in which we sold our interest on July 12, 2012.

Rental Property Operating and Maintenance Expense

Same Properties Portfolio rental property operating and maintenance expense increased $0.9 million, or 2%, while Total Portfolio rental property operating and maintenance expense increased $1.9 million, or 4%, for the nine months ended September 30, 2012 as compared to September 30, 2011, primarily due to increased building repair and maintenance costs across the portfolio combined with higher utility costs resulting from increased occupancy at certain properties.

Parking Expense

Same Properties Portfolio parking expense decreased $0.4 million, or 7%, while Total Portfolio parking expense decreased $0.4 million, or 6%, for the nine months ended September 30, 2012 as compared to September 30, 2011, primarily due to lower occupancy.

Other Expense

Total Portfolio other expense increased $1.0 million, or 20% for the nine months ended September 30, 2012 as compared to September 30, 2011, primarily due to our accrual of alternative minimum tax (“AMT”) related to taxable income generated by property dispositions during 2012, for which there was no comparable activity during 2011.

Depreciation and Amortization Expense

Same Properties Portfolio depreciation and amortization expense decreased $2.5 million, or 5%, while Total Portfolio depreciation and amortization expense decreased $3.4 million, or 6%, for the nine months ended September 30, 2012 as compared to September 30, 2011, primarily due to lower amortization of lease-related costs during 2012 as a result of lease terminations and the sale of the Westin® Pasadena Hotel in 2011.

Impairment of Long-Lived Assets

During the nine months ended September 30, 2012, we recorded a $2.1 million impairment charge in our Total Portfolio to reduce the carrying amount of an investment in real estate to estimated fair value, less costs to sell, for which there was no comparable activity during the nine months ended September 30, 2011.


25



MPG OFFICE TRUST, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Interest Expense

Same Properties Portfolio interest expense decreased $1.6 million, or 2%, for the nine months ended September 30, 2012 as compared to September 30, 2011, primarily due to the expiration of the KPMG Tower interest rate swap on August 9, 2012, which was partially offset by interest expense on the Plaza Las Fuentes mezzanine loan that was obtained in the fourth quarter of 2011. Total Portfolio interest expense increased $1.8 million, or 1%, for the nine months ended September 30, 2012 as compared to September 30, 2011, mainly due to accrual of default interest on Two California Plaza and 3800 Chapman, which was partially offset by the impact of the expiration of the KPMG Tower interest rate swap on August 9, 2012.

Equity in Net Income of Unconsolidated Joint Venture

Equity in net income of unconsolidated joint venture increased $14.4 million for the nine months ended September 30, 2012 as compared to September 30, 2011 due to our 20% share of the gain on sale of real estate of Wells Fargo Center – Denver by the joint venture.

Discontinued Operations

Our income from discontinued operations of $245.9 million for the nine months ended September 30, 2012 was comprised primarily of a $195.0 million gain on settlement of debt recorded in connection with the disposition of 700 North Central, 801 North Brand, the Brea Campus, Stadium Towers Plaza, Glendale Center and 500 Orange Tower and a $66.7 million gain on sale of real estate recorded in connection with the disposition of 700 North Central, 801 North Brand, the Brea Campus, Stadium Towers Plaza, the City Tower development land, Glendale Center and 500 Orange Tower. Our income from discontinued operations of $198.6 million for the nine months ended September 30, 2011 was comprised primarily of a $190.4 million gain on settlement of debt recorded in connection with the disposition of 701 North Brand, 550 South Hope, 2600 Michelson and City Tower and a $73.8 million gain on sale of real estate recorded in connection with the disposition of 701 North Brand, 550 South Hope, the Westin® Pasadena Hotel and City Tower.

Cash Flow

The following summary discussion of our cash flow is based on the consolidated statements of cash flows in our consolidated financial statements contained in this prospectus supplement and is not meant to be an all-inclusive discussion of the changes in our cash flow for the periods presented below. The cash flow amounts shown below include the activities of discontinued operations.

 
For the Nine Months Ended
 
Increase/
(Decrease)
 
September 30, 2012
 
September 30, 2011
 
 
(In thousands)
Net cash provided by (used in) operating activities
$
11,958

 
$
(15,844
)
 
$
27,802

Net cash provided by investing activities
24,141

 
177,998

 
(153,857
)
Net cash used in financing activities
(36,696
)
 
(102,261
)
 
(65,565
)

As discussed above, our business requires continued access to adequate cash to fund our liquidity needs. Over the last several years, we have maintained our liquidity position through secured debt financings, cash‑generating asset sales and asset dispositions at or below the debt in cooperation with our lenders, as well as reductions in leasing costs, discretionary capital expenditures, property operating expenses, and general and administrative expenses. We are working to address challenges to our liquidity position, particularly debt maturities, leasing costs and capital expenditures. See “Liquidity and Capital Resources” above for a detailed

26



MPG OFFICE TRUST, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

discussion of our potential sources and uses of liquidity. In the event we are unable to meet our liquidity challenges, we could become insolvent.

Operating Activities

Our cash flow from operating activities is primarily dependent upon (1) the occupancy level of our portfolio, (2) the rental rates achieved on our leases, and (3) the collectability of rent and other amounts billed to our tenants and is also tied to our level of operating expenses and other general and administrative costs. Net cash provided by operating activities during the nine months ended September 30, 2012 totaled $12.0 million, compared to net cash used in operating activities of $15.8 million during the nine months ended September 30, 2011. Termination payments from Beacon Capital combined with reductions in cash applied by special servicers for interest on defaulted mortgage loans were the primary drivers of the change in net cash provided by (used in) operating activities.

Investing Activities

Our cash flow from investing activities is generally impacted by the amount of capital expenditures for our office properties. Net cash provided by investing activities totaled $24.1 million during the nine months ended September 30, 2012, compared to net cash provided by investing activities of $178.0 million during the nine months ended September 30, 2011. Lower proceeds from disposition of real estate and increases in restricted cash from the funding of loan reserves in connection with the KPMG Tower mortgage loan extension and cash held by the special servicer at Two California Plaza, partially offset by distributions received from the unconsolidated joint venture during 2012, were the primary drivers of the change in net cash provided by investing activities.

Financing Activities

Our cash flow from financing activities is generally impacted by our loan activity, less any dividends and distributions paid to our stockholders and noncontrolling common units of our Operating Partnership, if any. Net cash used in financing activities totaled $36.7 million during the nine months ended September 30, 2012, compared to net cash used in financing activities of $102.3 million during the nine months ended September 30, 2011. Decreased mortgage loan and unsecured term loan payments were the primary driver of the change in net cash used in financing activities. Due to our focus on preserving our unrestricted cash and the availability of substantial NOL carryforwards to offset future taxable income, we do not expect to pay distributions on our common stock and Series A preferred stock for the foreseeable future.

Undeveloped Properties

We periodically evaluate the size, timing, costs and scope of our entitlement-related work and, as necessary, scale activity to reflect our financial position, overall economic conditions and the real estate fundamentals that exist in our submarkets. We expect to allocate a limited amount of cash towards pursuing and preserving entitlements during the near term.

Off-Balance Sheet Arrangements

We have certain off-balance sheet arrangements, consisting primarily of our 20% interest in MPG Beacon Venture, LLC, which we believe are appropriately disclosed in this prospectus supplement, our Annual Report on Form 10-K filed with the SEC on March 15, 2012 and elsewhere. We do not believe that any of these off-balance sheet arrangements have or are reasonably likely to have a material effect on our financial condition, results of operations, liquidity or capital resources.


27



MPG OFFICE TRUST, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Contractual Obligations

The following table provides information with respect to our commitments as of September 30, 2012, including any guaranteed or minimum commitments under contractual obligations.

 
2012
 
2013
 
2014
 
2015
 
2016
 
Thereafter
 
Total
 
(In thousands)
Principal payments on mortgage loans –
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated obligation, excluding
     mortgages in default
$
140

 
$
898,573

 
$
600

 
$
627

 
$
500,481

 
$
550,000

 
$
1,950,421

Mortgages in default (1)
514,370

 

 

 

 

 

 
514,370

Interest payments –
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-rate debt (2)
21,343

 
76,067

 
56,452

 
56,452

 
46,803

 
8,352

 
265,469

Variable-rate debt (3)
3,461

 
11,413

 
1,468

 
1,440

 
947

 

 
18,729

Mortgages in default (1)
55,352

 

 

 

 

 

 
55,352

Capital leases (4)
84

 
266

 
135

 
136

 
218

 

 
839

Operating lease (5)
201

 
820

 
290

 

 

 

 
1,311

Property disposition obligations –
 
 
 
 
 
 
 
 
 
 
 
 
 
Lease takeover obligation (6)
198

 
799

 
833

 
841

 
424

 

 
3,095

Tenant-related commitments (7) –
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated obligation, excluding
     mortgages in default
8,154

 
13,983

 
976

 
6,216

 
542

 
11,655

 
41,526

Mortgages in default
1,352

 
706

 
181

 
180

 
185

 
410

 
3,014

Air space and ground leases –
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated obligation, excluding
     mortgages in default (8)
72

 
288

 
288

 
289

 
289

 
3,150

 
4,376

Mortgages in default (9)
1,300

 
1,950

 
2,340

 
2,340

 
2,340

 
285,896

 
296,166

 
$
606,027

 
$
1,004,865

 
$
63,563

 
$
68,521

 
$
552,229

 
$
859,463

 
$
3,154,668

__________
(1)
Amounts shown for principal payments related to mortgages in default reflect maturity in 2012 as they will be settled on or before December 31, 2012, the definitive outside date for the disposition of these properties per agreements with the special servicer. Amounts shown for interest related to mortgages in default are based on contractual and default interest rates per the loan agreements and have been calculated through December 31, 2012, the definitive outside date for the disposition of these properties. Interest amounts that were contractually due and unpaid as of September 30, 2012 are included in the 2012 column. Management does not intend to settle principal and interest amounts with unrestricted cash. We expect these amounts to be settled in a non-cash manner at the time of disposition. On October 1, 2012, a trustee sale was held with respect to Two California Plaza pursuant to which the property was disposed. See “Subsequent Event.”
(2)
Interest payments on our fixed-rate debt are calculated based on contractual interest rates and scheduled maturity dates.
(3)
Interest payments on our variable-rate debt are calculated based on scheduled maturity dates and the one-month LIBOR rate of 0.21% as of September 30, 2012 plus the contractual spread per the loan agreement.
(4)
Includes principal and interest payments.
(5)
Includes operating lease obligations for subleased office space at 1733 Ocean. We have mitigated this obligation through sublease of that space to third-party tenants. The amounts expected to be mitigated through future sublease payments total $160, $653 and $237 for the years ending December 31, 2012, 2013 and 2014, respectively.
(6)
Includes a lease takeover obligation at a property that was disposed in 2009. We have partially mitigated this obligation through a sublease of the entire space to a third-party tenant. The amounts expected to be mitigated through future sublease payments total $150, $610, $628, $647 and $329 for the years ending December 31, 2012, 2013, 2014, 2015 and 2016, respectively.
(7)
Tenant-related commitments include tenant improvements and leasing commissions and are based on executed leases as of September 30, 2012. We are not currently funding tenant‑related commitments for mortgages in default. Amounts are being funded by the special servicers using restricted cash held at the property level.
(8)
Includes an air space lease for Plaza Las Fuentes. The air space rent is calculated through the lease expiration date in 2027.
(9)
Includes a ground lease for Two California Plaza. Ground lease amounts that were contractually due and unpaid as of September 30, 2012 are included in the 2012 column. The ground rent for Two California Plaza is calculated through the lease expiration date in 2082. On October 1, 2012, a trustee sale was held with respect to Two California Plaza pursuant to which the property was disposed. See “Subsequent Event.”


28



MPG OFFICE TRUST, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Litigation

We are involved in various litigation and other legal matters, including personal injury claims and administrative proceedings, which we are addressing or defending in the ordinary course of business. Management believes that any liability that may potentially result upon resolution of the matters that are currently pending will not have a material adverse effect on our business, financial condition or financial statements as a whole. As described in “Indebtedness,” mortgage loans encumbering two of our properties were in default as of September 30, 2012. The resolution of some of these defaults may involve various legal actions, including court‑appointed receiverships, damages claims and foreclosures.

Critical Accounting Policies

Please refer to our Annual Report on Form 10-K filed with the SEC on March 15, 2012 for a discussion of our critical accounting policies for “Impairment Evaluation” and “Revenue Recognition.” There have been no changes to these policies during the three months ended September 30, 2012.

New Accounting Pronouncements

There are no recently issued accounting pronouncements that are expected to have a material effect on our financial condition and results of operations in future periods.

Subsequent Event

Two California Plaza Disposition

On October 1, 2012, a trustee sale was held with respect to Two California Plaza. As a result of the foreclosure, we were relieved of the obligation to repay the $470.0 million mortgage loan secured by the property as well as accrued contractual and default interest on the mortgage loan. In addition, we received a general release of claims under the loan documents pursuant to a previous in-place agreement with the special servicer.

Non-GAAP Supplemental Measure

Funds from operations (“FFO”) is a widely recognized measure of REIT performance. We calculate FFO in accordance with the White Paper on FFO approved by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”). The White Paper defines FFO as net income or loss (as computed in accordance with GAAP), excluding extraordinary items (as defined by GAAP), gains from disposition of depreciable real estate and impairment writedowns of depreciable real estate, plus real estate-related depreciation and amortization (including capitalized leasing costs and tenant allowances or improvements). Adjustments for the unconsolidated joint venture are calculated to reflect FFO on the same basis.

Management uses FFO as a supplemental performance measure because, in excluding real estate-related depreciation and amortization, impairment writedowns of depreciable real estate and gains from disposition of depreciable real estate, it provides a performance measure that, when compared year over year, captures trends in occupancy rates, rental rates and operating costs. We also believe that, as a widely recognized measure of the performance of REITs, FFO will be used by investors as a basis to compare our operating performance with that of other REITs.

However, because FFO excludes depreciation and amortization and captures neither the changes in the value of our properties that result from use or market conditions nor the level of capital expenditures and leasing commissions necessary to maintain the operating performance of our properties, all of which have real economic

29



MPG OFFICE TRUST, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

effect and could materially impact our results from operations, the utility of FFO as a measure of our performance is limited. Other Equity REITs may not calculate FFO in accordance with the NAREIT White Paper and, accordingly, our FFO may not be comparable to such other Equity REITs’ FFO. As a result, FFO should be considered only as a supplement to net income or loss as a measure of our performance. FFO should not be used as a measure of our liquidity, nor is it indicative of funds available to meet our cash needs, including our ability to pay dividends or
make distributions. FFO also should not be used as a supplement to or substitute for cash flow from operating activities (as computed in accordance with GAAP).

A reconciliation of net income available to common stockholders to FFO is as follows (in thousands, except share and per share amounts):

 
 
For the Three Months Ended
 
For the Nine Months Ended
 
 
Sept. 30, 2012
 
Sept. 30, 2011
 
Sept. 30, 2012
 
Sept. 30, 2011
Net income available to common stockholders
$
87,999

 
$
25,595

 
$
160,483

 
$
104,471

Add:
Depreciation and amortization of real estate assets
19,733

 
24,334

 
62,828

 
79,333

 
Depreciation and amortization of real estate assets –      unconsolidated joint venture (1)
671

 
1,743

 
2,796

 
5,174

 
Impairment writedowns of depreciable real estate

 
9,330

 
2,121

 
23,218

 
Impairment writedowns of depreciable real estate –
     unconsolidated joint venture (1)
731

 

 
2,907

 

 
Net income attributable to common units of
     our Operating Partnership
2,373

 
2,915

 
11,252

 
13,193

 
(Unallocated) allocated losses –
      unconsolidated joint venture (1)
(1,097
)
 
(776
)
 
283

 
(1,150
)
Deduct:
Gains on sale of real estate
45,483

 
10,215

 
66,707

 
73,844

 
Gains on sale of real estate –
     unconsolidated joint venture (1)

 

 
18,958

 

Funds from operations available to common stockholders
     and unit holders (FFO)
$
64,927

 
$
52,926

 
$
157,005

 
$
150,395

Company share of FFO (2) (3)
$
63,222

 
$
46,930

 
$
145,232

 
$
133,139

 
 
 
 
 
 
 
 
 
FFO per share – basic
$
1.13

 
$
0.94

 
$
2.75

 
$
2.70

FFO per share – diluted
$
1.11

 
$
0.92

 
$
2.71

 
$
2.64

Weighted average number of common shares outstanding – basic
56,118,506

 
49,961,007

 
52,831,545

 
49,342,879

Weighted average number of common and
     common equivalent shares outstanding – diluted
57,068,266

 
50,988,030

 
53,584,705

 
50,479,393

___________
(1)
Amount represents our 20% ownership interest in the unconsolidated joint venture.
(2)
Based on a weighted average interest in our Operating Partnership of approximately 97.4% and 88.7% for the three months ended September 30, 2012 and 2011, respectively.
(3)
Based on a weighted average interest in our Operating Partnership of approximately 91.8% and 88.5% for the nine months ended September 30, 2012 and 2011, respectively.

The amounts shown in the table above will not agree to those previously reported in our Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2011 due to recent clarifications by the SEC regarding NAREIT’s definition of FFO. In response to those clarifications, we have amended our calculation of FFO to exclude impairment writedowns of depreciable real estate from all periods presented.

30



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


Consolidated Balance Sheets as of September 30, 2012 (unaudited) and December 31, 2011
F-1
 
 
Consolidated Statements of Operations (unaudited) for the three and nine months ended
     September 30, 2012 and 2011
F-2
 
 
Consolidated Statements of Comprehensive Income (unaudited) for the three and nine months ended
    September 30, 2012 and 2011
F-3
 
 
Consolidated Statement of Deficit (unaudited) for the nine months ended September 30, 2012
F-4
 
 
Consolidated Statements of Cash Flows (unaudited) for the nine months ended
     September 30, 2012 and 2011
F-5
 
 
Notes to Consolidated Financial Statements (unaudited)
F-7






MPG OFFICE TRUST, INC.

CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
 
September 30, 2012
 
December 31, 2011
 
(Unaudited)
 
 
ASSETS
 
 
 
Investments in real estate:
 
 
 
Land
$
192,564

 
$
248,835

Acquired ground leases
57,564

 
55,801

Buildings and improvements
1,611,467

 
1,930,516

Land held for development
45,155

 
63,938

Tenant improvements
259,329

 
285,700

Furniture, fixtures and equipment
2,032

 
2,190

 
2,168,111

 
2,586,980

Less: accumulated depreciation
(615,216
)
 
(659,408
)
Investments in real estate, net
1,552,895

 
1,927,572

 
 
 
 
Cash and cash equivalents
117,372

 
117,969

Restricted cash
72,978

 
74,387

Rents and other receivables, net
3,402

 
4,796

Deferred rents
51,251

 
54,663

Deferred leasing costs and value of in-place leases, net
56,761

 
71,696

Deferred loan costs, net
7,605

 
10,056

Other assets
4,920

 
7,252

Assets associated with real estate held for sale

 
14,000

Total assets
$
1,867,184

 
$
2,282,391

 
 
 
 
LIABILITIES AND DEFICIT
 
 
 
Liabilities:
 
 
   
Mortgage loans
$
2,464,084

 
$
3,045,995

Accounts payable and other liabilities
110,524

 
140,212

Excess distributions received from unconsolidated joint venture
7,700

 

Acquired below-market leases, net
14,037

 
24,110

Total liabilities
2,596,345

 
3,210,317

 
 
 
 
Deficit:
 
 
 
Stockholders’ Deficit:
 
 
   
7.625% Series A Cumulative Redeemable Preferred Stock,
    $0.01 par value, $25.00 liquidation preference, 50,000,000 shares
    authorized; 9,730,370 shares issued and outstanding
    as of September 30, 2012 and December 31, 2011
97

 
97

Common stock, $0.01 par value, 100,000,000 shares authorized;
    57,120,182 and 50,752,941 shares issued and outstanding
    as of September 30, 2012 and December 31, 2011, respectively
571

 
508

Additional paid-in capital
608,056

 
703,436

Accumulated deficit and dividends
(1,331,513
)
 
(1,504,759
)
Accumulated other comprehensive income (loss)
707

 
(15,166
)
Total stockholders’ deficit
(722,082
)
 
(815,884
)
Noncontrolling Interests:
 
 
   
Accumulated deficit and dividends
(7,079
)
 
(118,049
)
Accumulated other comprehensive income

 
6,007

Total noncontrolling interests
(7,079
)
 
(112,042
)
Total deficit
(729,161
)
 
(927,926
)
Total liabilities and deficit
$
1,867,184

 
$
2,282,391

See accompanying notes to consolidated financial statements.

F-1



MPG OFFICE TRUST, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in thousands, except share and per share amounts)
 
For the Three Months Ended
 
For the Nine Months Ended
 
Sept. 30, 2012
 
Sept. 30, 2011
 
Sept. 30, 2012
 
Sept. 30, 2011
Revenue:
 
 
 
 
 
 
 
Rental
$
38,352

 
$
41,149

 
$
113,851

 
$
123,879

Tenant reimbursements
19,707

 
20,532

 
57,542

 
60,148

Parking
7,725

 
8,195

 
24,027

 
24,395

Management, leasing and development services
414

 
2,590

 
2,196

 
4,715

Interest and other
1,481

 
580

 
15,794

 
2,504

Total revenue
67,679

 
73,046

 
213,410

 
215,641

 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
Rental property operating and maintenance
19,178

 
17,436

 
52,968

 
51,075

Real estate taxes
6,439

 
6,528

 
18,539

 
18,949

Parking
2,013

 
2,074

 
6,135

 
6,524

General and administrative
5,861

 
5,258

 
17,721

 
17,257

Other expense
1,831

 
1,794

 
6,081

 
5,086

Depreciation and amortization
19,100

 
20,958

 
57,610

 
61,014

Impairment of long-lived assets

 

 
2,121

 

Interest
40,733

 
42,845

 
126,767

 
124,985

Loss from early extinguishment of debt

 

 

 
164

Total expenses
95,155

 
96,893

 
287,942

 
285,054

 
 
 
 
 
 
 
 
Loss from continuing operations before equity in
     net income (loss) of unconsolidated joint venture
(27,476
)
 
(23,847
)
 
(74,532
)
 
(69,413
)
Equity in net income (loss) of unconsolidated joint venture
38

 
204

 
14,312

 
(129
)
Loss from continuing operations
(27,438
)
 
(23,643
)
 
(60,220
)
 
(69,542
)
 
 
 
 
 
 
 
 
Discontinued Operations:
 
 
 
 
 
 
 
Loss from discontinued operations before gains on
     settlement of debt and sale of real estate
(2,419
)
 
(18,736
)
 
(15,826